Trade Cycles /Business Cycle / Business Economics Cycle

Introduction:

The Trade cycle is a part of the economics system. It refers to the fluctuation in economic activities or rises and falls in economic activities like increasing or decreasing in Investment, level of Output, level of Employment, and level of Income. 

According to Keynes, "A trade cycle is composed of periods of good trade, characterized by rising in price and low unemployment percentages, altering with periods of bad trade characterized by falling price and high unemployment percentage".

As per the above definition, Business activities differ from time to time that is the period of prosperity is followed by the recession than on affecting Gross National Product (GNP), employment, real income, price level, profits, etc.

The features or characteristics of the trade cycle are:-

1. Fluctuation: Trade cycles are fluctuations within the level of aggregate economic activities. It's related to changes in employment, investment, profits GDP, etc.
2. Phases: Trade cycles have different phases like Prosperity, Recession, Depression, and Recovery.
3. Expansion and Contraction: Expansion means increasing in consumption, production, employment, prices, GDP, etc. and Contraction means a decrease in production, GDP, employment, consumption, price level, etc.
4. Recurrent but not Periodic: The fluctuation isn't periodic. It doesn't occur regularly. Trade cycles occur periodically but they don't show the same regularity.
5. Trough: It means the lowest point of the trade cycle so this is a turning point where the economic activity is at rock bottom (Lowest). The trough may be short-lived or may continue at the bottom for sometimes but its sign wave for the revive of the economy.
6. Peak: The expansionary process reaches an awfully high level of production referred to as the height. It is a symptom of the end of the prosperity and beginning of the recession.

Phases of Trade Cycles

The ups and downs within the economy are reflected by the fluctuation in macroeconomics variables like GNP, investment, profits, price, employment, wages, etc. This variation shows different phases in figure 4.2.

Prosperity Phase:

• An increase in output, Employment, Investment Demand, Profit, Bank loans, prices, the standard of living, etc. 
• There is an increase in the rate of interest, the high marginal efficiency of capital.
• There is a rise within the supply of money, a rise in the economic transaction and bank credit, and overall business optimism.

Depression Phases: 

• Depression is a period of low economic activity, the growth rate below the steady growth.
• A continuous fall within the level of output, trade and transaction, price deflation, and decline in bank credit.
• With the decline in MEC (Marginal Efficiency Capital) and investment, the economy operates at its lowest capacity.
• A considerable fall within the rate of interest, wage rate, and overall business pessimism.

Recession Phase:

• A downfall within the level of employment.
• A fall in factor prices and commodity prices.
• A reduction within the output level of different goods and services.
• Investment starts falling because of the decline within the rate of profit, a sharp decline reserve.
• The Financial market becomes weak at this level and the share prices fall rapidly.

Recovery Phases: 

• At this stage economy start showing a positive sign in economic activities like output, income, employment, investment, etc. but the growth rate may remain below a steady growth rate. And enters recovery phases. In the recovery phase, consumers increase their consumption, as a result, the demand for consumer products rises.
• The price mechanism plays a vital role in the recovery phase of the economy.

Control of Trade Cycle 

The Trade cycle not only harms business activities but also human beings by creating unemployment and poverty. therefor it is very important to prevent and protect by stabilizing the economy. Stabilization means preventing ups and down (Fluctuation in economic activities) in the economy without preventing the possibility of Economics growth. The two most important economics policy to control the trade cycle are: 

• Monetary policy: It means controlling the money supply so the Central bank (RBI) plays a very important role in controlling money supply in an economy. The central bank uses various instruments to control money supply like Bank Rate, Open Market Operation, SLR, CRR, selective credit control., etc. that reduces money supply during the expansionary phase when the price level is rising and vice versa. 
• Fiscal policy: It means budgeting policy of government revenue and government expenditure to control the business fluctuations. During the depression phase, fiscal policy may be used to increase aggregate demand by increasing government expenditure and reducing taxes. Similarly, during the inflationary government increase the taxes and reduce government expenditure. 

The Trade cycle cannot be prevented completely but proper forecasting and effective use of stabilization policies severity can be brought down.

Edited by: Imaduddin Khan (BMS, MA in Business Economics,M.Com)

Reference: MHSB and Manan Prakashan